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The use of flexible pay soared during the 1990s. Companies compensated employees with bonuses and stock options. That enabled them to share the good times with workers -- while preserving their ability to slash costs in bad times by rolling back the special pay. David Lewin, a business professor at the University of California at Los Angeles, estimates that 66% of U.S. workers got variable pay last year, up from 30% a decade earlier.
Nobody likes losing a bonus, but it may be the price for saving jobs. There's growing evidence that companies cut fewer workers in the recession that began last March than they would have if their pay had been less flexible. In the 1990-91 recession, the unemployment rate jumped 2.8 percentage points. This time, the jobless rate rose much less, from 4% last March to 5.6% this January. Because unemployment is a lagging indicator, economists expect the rate to rise more but not as much as in 1990-91.
HELP "AT THE MARGIN." While companies kept workers, they held back on variable pay. UCLA's Lewin calculates that variable pay rose 9.5% in 1999, then slowed to 6% growth in 2000, and to about 3% in 2001. Among the companies that say flexibility helped minimize layoffs are Rockwell International and Agilent Technologies.
While the lid on variable pay hasn't eliminated layoffs, says Steven E. Gross, a compensation consultant at William M. Mercer Inc., "it has helped reduce job cuts at the margin."